Most Canadians have the power to avoid paying tax on their investment gains: Dale Jackson

If you’re a typical Canadian investor being forced to pay tax on your investment gains, there’s probably a way to avoid it altogether.

Yet each tax season many receive T5 slips from the Canada Revenue Agency (CRA) instructing them to claim investment income on their returns.

Not to be confused with the T4 slip for employment income, the T5 tallies investment income from dividends, bonds, high-interest savings accounts, guaranteed investment certificates (GICs), and the sale of stocks and equity funds.

In most cases, those same investments could have been sheltered from taxation in registered accounts including a tax free savings account (TFSA) or registered retirement savings plan (RRSP).

In some cases, it can’t be avoided. Employer share programs, for example, rarely provide a TFSA or RRSP options. But even they provide options to cash out after certain periods of time of you want to transfer the funds to a registered account.

TFSA: the ultimate way to avoid taxation

You can avoid taxation - and the dreaded T5 - on just about any investment by investing that cash in a TFSA. You can even repurchase the same shares if you wish.

The total TFSA contribution limit was expanded by $7,000 on January first. That means an additional $7,000 in contribution space for the vast majority of Canadians who have not contributed the maximum allowable amount in previous years. Allowable amounts are carried forward each year.

Total contribution space varies for individuals based on contributions and withdrawals made over the years. To get an idea of how significant the TFSA has become, the total contribution limit for eligible investors who have never contributed to their TFSA since its introduction in 2009 to $109,000.

The total contribution limit could be much higher for individual TFSA investors who have made gains and withdrawn funds over the years because the amount withdrawn is restored as contribution space the following calendar year.

Shelter investments from taxation in an RRSP

Originally billed as a short-term savings vehicle for things like vacations or home renovations, the TFSA has grown into a potential retirement tax-planning tool that can compliment a RRSP.

Their differences are their strengths. RRSP contributions can be deducted from taxable income (unlike TFSAs) and grow tax free, but those contributions and the returns they generate over time are fully taxed as income at the individual’s marginal rate when they are withdrawn.

With proper planning, RRSP (and eventually registered retirement income fund or RRIF) withdrawals can be capped at the lowest marginal tax rate in retirement and topped up with tax free money from a TFSA - lowering the overall tax bill significantly.

The RRSP contribution for 2026 limit is 18 per cent of the previous year’s income up to 33,810. Allowable amounts are also carried forward each year.

Both RRSPs and TFSAs can hold just about any type of investment including stocks traded on major exchanges, bonds, mutual funds or exchange traded funds (ETFs).